Is Groupon killing local businesses?

Groupon is very likely one of the fastest growing startups in history. There’s no denying how ably the company took popular trends by the reigns and molded them into an innovative and undeniably industry-changing service. And it’s easy to see why other businesses are quick to jump on board. The site says its subscribers are “one of the largest, most desirable audiences for any business – and one of the hardest to reach with traditional advertising.”

While the company’s got its demographics down pat, it fails to bring attention to the bigger picture effect it’s had on local businesses. And Groupon isn’t the only one to blame: We’re officially in the thick of deal-a-day culture – the knock-offs are too many to count and multiplying every day – and your average consumer’s purchasing habits could be described as hyper-local. But is Groupon the rising tide that lifts all boats, or the tsunami that sinks them?

It doesn’t work for everybody

If you’re a local business owner, there’s almost an expectation to use Groupon. There are too many success stories and statistics to ignore – but unfortunately it is not a catch-all. Isa ‘Glittergirl’ Isaacs owns and operates Temple of Poi, a fire dancing studio in the Bay Area. Isaacs explains her two Groupon offers were “super effective at getting me exposure in a mainstream market that I didn’t normally have exposure in,” but realized that many of these new customers were “window shoppers.”

According to Isaacs, more than a few customers who purchased the Groupon weren’t all that interested in poi, and were more drawn to the idea of adding an experience to their resume, or simply attracted to the savings and not the product. Needless to say, these people didn’t become returning customers.

Despite her focus on clarifying the expiration terms of her Groupon deal, Isaacs found that customers either called the first day or within the last two weeks of the coupon’s availability – a difficult timetable for a one-woman business to function on, considering classes cap at eight people. While Isaacs could schedule additional classes to satisfy user demand, she notes this isn’t possible for many businesses that defer to Groupon or similar services. Product-oriented business have a harder time meeting demand than service-oriented businesses do, something many of Groupon’s larger faux pas can be attributed to. Earlier this year, the site was overwhelmed with orders of a Japanese New Year’s meal that left many users demanding refunds.

Stuart Wall is the CEO of Signpost, an alternative to Groupon. Wall says that businesses with high margins have a big disadvantage when it comes to using Groupon. “If you’re a business where you can hit a max, you get in trouble with Groupons.” He notes that if you’re running a new business and need that initial influx of customers, the site will work for you: “For a subset I think it’s a great solution.” But for those that operate at peak situations – restaurants in particular – you risk cannibalizing your existing clientele.

Associate professor of management at Rice University Utpal Dholakia has spent 10 years studying online marketing issues and has been researching daily deal sites and their economic impact for the last eight to 10 months. He describes their very sudden popularity as a mania that has taken consumers by storm, and he realized there simply hasn’t been enough attention concerning how they are actually affecting businesses. Dholakia recently published a study assessing this very issue and determined that Groupon can be a benefit for business owners – as long as they do their research.

“Something like Groupon comes along, and [business owners] have really no idea what the potential loss or gain is,” he says. “A number of businesses just jump in without really thinking about what they are trying to accomplish.” Taking into account variables like customer caps and whether or not a deal should be exclusive to new customers is vital, Dholakia cautions, and business owners need to ask questions to find a deal with the most earning potential.

The real winners

Make no mistake, Groupon was created to make money. CEO Andrew Mason’s baby face and the site’s adorable, cartoonish UI might give you the warm fuzzies, but the company wasn’t founded on good will. Groupon deals first and foremost are meant to benefit Groupon, and consumers come in second. The businesses that make the entire scheme possibly finish third.

Which goes back to the lack of returning customers: Businesses that are able to snag loyal customers with the help of Groupon are a rarity. Instead, what Groupon is cultivating is a community of return customers for itself. Wall says that Groupon pushes businesses using it to not put a cap on how many customers can buy the deal – for its own benefit. A business might be wise to know it can only handle 100 customers and cap the coupon there, but Groupon wants to sell as many of the deals as it can to bring in as much revenue off the sales as possible. Groupon also doesn’t structure any sort of communication tools between businesses and customers: Instead, it serves as the middle man, and a popular one that consumers become more attached to than the actual vendor in question.

Isaacs learned she needed to work the Groupon machine. “I did not negotiate the first time around. I was an idiot,” she says. “Negotiate, negotiate, negotiate. Groupon offers you 50-50…plus takes out a percentage for credit cards, you pay that. You walk away with 23.5-percent.” The second time around, Isaacs learned the deal presented to her by Groupon was not in her best interest, and bargained to create her own.

In the long run, Dholakia says, small businesses cannot sustain the traditional Groupon model. Groupon’s business model is to offer deep discounts, and Dholakia’s research has shown these types of price promotions can potentially cause serious damage for vendors. “[These offer] very, very deep discounts…and if the only thing you do is give customers these discounts, you aren’t going to get any kind of loyalty from the customers. They aren’t really interested in your service or product. This can lead to low-quality customers.”

There’s a reason the little guys are little guys

Groupon and LivingSocial are household names, but there are plenty of smaller sites out there – and the number is growing every day. Zozi, Tippr, Savvy Avenue, and Town Hog are just a few of the many, many examples. Business owners may think that the sheer amount of daily deal site options available to them works in their favor. In reality, if you do find yourself in a position to make use of this business model, Groupon and LivingSocial are the way to go. “Add up everything I got from the others [smaller sites] and it doesn’t amount to what I got from the smaller of my two Groupon deals,” Isaacs says.

One site she worked with, Bay Area Half Off (talk about hyper-local), particularly stands out as a shining example of what to avoid. The site basically trades its advertising services for a large amount of your product, and hidden in the agreement is a clause allowing the company to reduce the listed price as much as they want in order to sell as much as possible. “They took my $180 class and charged $45 for it,” Isaacs says.

Dholokia recently conducted a second study researching the various Groupon spinoffs and competitors, and while he found that sites like LivingSocial, OpenTable, and Travelzoo operate extremely similarly to Groupon, they don’t pull in the same customer base as the original is able to.

Alternatives

Just because business owners should be wary of the non-Groupons and LivingSocials out there doesn’t mean there aren’t alternatives. However, instead of adopting the same business scheme, these companies are molding it into something different entirely.

The previously mentioned Signpost describes itself as the AdWords of daily deal sites. From the consumer standpoint, the setup is extremely familiar, but businesses are given more flexibility. There is no aggressive sales team contacting local vendors, or negotiating process over the small print of the deal. Instead, deals are posted in real-time by business owners, who offer whatever discount they want to.

But the primary issue Signpost wanted to address was the lack of repeating customers. The site offers business owners the ability to see who bought their deals and follow-up with a note of thanks or additional coupon after redeeming the first. It even gives owners a look at those viewing the coupons, so they can reach out to potential customers as well.

The idea is catching on, especially in smaller cities. Wall notes that the big cities have become so overwhelmed with the aggressive marketing of more established, traditional deal-a-day sites that many aren’t buying. Smaller markets, however, are still interested – and he notes the coupon conversion rates in small towns are actually higher.

Taking the notion of putting control back into business owners’ hands, newly-launched site thruSocial wants to give vendors all the options. The site helps business jump through social networking hoops, from creating a Facebook Page to setting up their own online daily deals, which link to thruSocial’s coupon site, thruPons.com. Of course, there’s a fee attached (although for a couple more weeks, the site’s offering free trials).

One thing is certain: Groupon introduced us to a new kind of buyer-seller relationship, and it’s not going away anytime soon. “There is no question that there is an appetite for daily deals from customers,” Dholokia says. “This is a very new industry; we’ll have to see how these things evolve.” But businesses may have to push for that evolutionary process, as he wisely notes “…small businesses can’t offer 50-percent discounts again and again and again.”